Whether “national housing” under Article 106(1)4 of the Restriction of Special Taxation Act constitutes “national housing” for which value-added tax is exempted under Article 106(1)4 of the same Act (negative)

In full view of the language and structure of Article 106(1)4 of the Restriction of Special Taxation Act (hereinafter “tax-free provision”), Articles 106(4)1, and 51-2(3) of the Enforcement Decree of the Restriction of Special Taxation Act, Article 2 subparags. 3, 1, and 1-2 of the former Housing Act (wholly amended by Act No. 13805, Jan. 19, 2016); Article 2-2 subparag. 4 of the former Enforcement Decree of the Housing Act (wholly amended by Presidential Decree No. 27444, Aug. 11, 2016); Article 3-5 [Attachment Table 1] subparag. 14(b) of the Enforcement Decree of the Building Act; the purpose of the said tax-free provision to exempt supply of housing below national housing; the difference in various legal regulations on housing and officetels; and in particular, whether an officetel’s supply of housing or an officetel’s supply of housing can be deemed to constitute “national housing without special circumstances” as at the time of supply.

If a building supplied satisfies the requirements of officetels under relevant statutes and was registered as a business facility on the public register, even if it has the structure and function that can be actually used for residence at the time of its supply, it may be used as a business facility which is the purpose of an officetel under the Building Act. In such cases, whether it constitutes an officetel that cannot be subject to the above tax exemption provision ought to be determined on the basis of the public record at the time of supply, in principle, on the basis of the purpose of use in the public record at the time of supply. Furthermore, as long as the use in the public record at the time of supply is excluded from an officetel that is business facility

Articles 95-2(1), 96(1), 97-6(1), 99-2(1), and 106(1)4 of the Restriction of Special Taxation Act, Article 51-2(3), 95(2), 96(2)2, 97-6(2)1, 99-2(1)9, and 106(4)1 of the former Housing Act (wholly amended by Act No. 13805, Jan. 19, 2016); Article 2 subparag. 1 and 1-2(1), Article 3(5) of the Enforcement Decree of the Restriction of Special Taxation Act (see Article 2 subparag. 4 of the current Enforcement Decree of the Building Act); Article 51-2(3), Article 95(2), Article 96(2)2(2)2, Article 97-6(2)2, Article 97-6(2)2, Article 97-6(2)4 of the Enforcement Decree of the former Housing Act (wholly amended by Presidential Decree No. 427 subparag. 4(4) of the current Enforcement Decree of the Building Act)

Plaintiff and one other (Bae, Kim & Lee LLC, Attorneys Cho Il-young et al., Counsel for the plaintiff-appellant)

Kimhae Tax Office et al.

Busan High Court Decision 2019Nu23586 decided May 8, 2020

All appeals are dismissed. The costs of appeal are assessed against the plaintiffs.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Case summary

A. New construction and sale of a primary complex building by the plaintiffs

(1) In 2014, the Plaintiffs registered the business of the Housing Construction and Sales Business under the trade name of “(trade name omitted)”. After obtaining permission from the competent authority, the Plaintiffs newly constructed “(building name 1 omitted) a main complex building consisting of 8 households and 4 households of an officetel on the land outside Busan Metropolitan Government ( Address 1 omitted) with the permission of the competent authority, and subsequently sold it in 2015. Of them, the sales of 4 households of an officetel, which are business facilities entered in the public register, was carried out in the first taxable period of value-added tax in 2015.

(2) On May 26, 2015, Plaintiff 1, along with the Nonparty, registered the housing construction and sales business under the name of “(mutual name 2 omitted)”. After obtaining a construction permit from the competent authority, and newly constructed “(name 2 omitted) multi-family housing 26 households and officetel 15 households” on the land outside Busan-gu, Busan-gu, Busan-gu, and sold it in the middle of 2016 after obtaining approval for use. Of them, the sales of 15 households of officetels 15 units, which are business facilities registered in the public register, was conducted in the first and second taxable periods of 2016.

B. Disposition imposing value-added tax of this case

(1) The Plaintiffs and Plaintiff 1 respectively deemed that the supply of 4 households of “(the name of the building omitted 1 omitted)” and 15 households of “(the name of the building omitted 2) officetels” (hereinafter “the instant officetels”) are eligible for the exemption of value-added tax pursuant to Article 106(1)4 of the Restriction of Special Taxation Act (hereinafter “instant tax exemption provision”), and filed a return of value-added tax exemption thereon.

(2) On May 4, 2018, the director of the Busan District Tax Office notified the head of the Busan District Tax Office and the director of the Busan District Tax Office of taxation data on the ground that the supply of the instant officetel does not fall under the exemption of value-added tax under the instant tax exemption provision. On May 4, 2018, the director of the Busan District Tax Office issued a revised and notified Plaintiff 1 of the value-added tax of KRW 61,067,280 (including additional tax) for the year 2015. On the same day, the director of the Busan District Tax Office issued a revised and notified Plaintiff 1 of the value-added tax of KRW 1,252,086,280 for the year 2016 and the value-added tax of KRW 128,428,760 (including additional tax) for the second year of value-added tax of KRW 20

C. Disposition imposing global income tax of this case

(1) The Plaintiffs calculated the amount of income for the year 2014, which was the taxable period immediately preceding the year 2015, on the grounds that the sales revenue of “(name 1 omitted)” was less than KRW 36 million, which is the standard amount prescribed in Article 143(4)2(b) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 28637, Feb. 13, 2018; hereinafter the same) and filed a comprehensive return and payment of the income tax for the year 2015, respectively.

Plaintiff 1 calculated the amount of income according to the estimation method under the simple expense rate on the ground that the amount of income in 2015, which was the immediately preceding taxable period in 2016, falls short of KRW 36 million, which is the standard amount prescribed in Article 143(4)2(b) of the former Enforcement Decree of the Income Tax Act, due to the occurrence of the sales revenue of “(name 2 omitted of the building)” and returned and paid the comprehensive income tax for 2016.

(2) After conducting an individual consolidated investigation against the plaintiffs, the director of Busan District Tax Office and the director of Busan District Tax Office notify the plaintiffs and the director of Busan District Tax Office of taxation data that the plaintiffs and the plaintiff 1 should estimate and correct the amount of income by applying standard expense rate which is not simple expense rate because the amount of income for the pertinent taxable period exceeds KRW 150 million, which is the standard amount of income under Articles 143(4)1 and 208(5)2(b) of the former Enforcement Decree of the Income Tax Act.

On May 4, 2018, the director of the regional tax office of the defendant Kim Jong-soo corrected and notified the plaintiff 1 of the global income tax of KRW 35,390,550 for the year 2015 and KRW 320,121,270 for the global income tax of the year 2016. The director of the regional tax office of the defendant Seosan notified the plaintiff 2 of the correction and notification of KRW 35,878,560 for the global income tax of KRW 35,878,560 for the year 2015 (hereinafter collectively referred to as “instant global income

2. Whether the supply of the instant officetel is exempt from value-added tax pursuant to the instant tax exemption provision (Plaintiff 1’s ground of appeal No. 1)

A. According to the instant tax exemption clause, value-added tax shall be exempted on the supply of national housing prescribed by Presidential Decree. Article 106(4)1 of the Enforcement Decree of the Restriction of Special Taxation upon delegation of the said “national housing prescribed by Presidential Decree” provides for “housing below the size prescribed in Article 51-2(3).” Article 51-2(3) of the Enforcement Decree of the said Act sets the said size as “national housing scale under the Housing Act.” Furthermore, Article 2 subparag. 3 of the former Housing Act (wholly amended by Act No. 13805, Jan. 19, 2016; hereinafter the same shall apply) sets the “scale of national housing” as “housing area used exclusively for residential purposes (hereinafter referred to as “exclusive residential area”) with the exclusive residential area of 1 house or 85 square meters per household (excluding the Seoul Metropolitan area under Article 2 subparag. 1 of the Seoul Metropolitan Area Readjustment Planning Act, the exclusive residential area or 100 square meters per Eup/Myeon.”

In addition, Article 2 subparag. 1 of the former Housing Act defines “house” as “all or part of a building with a structure wherein members of a household can live an independent residential life for a long time,” and defines “quasi-housing” as “a building other than a house and facilities available as a residential facility, etc.” under subparagraph 1-2, and delegates its scope and type to the Presidential Decree. Article 2-2 subparag. 4 of the former Enforcement Decree of the Housing Act (wholly amended by Presidential Decree No. 27444, Aug. 11, 2016; hereinafter the same) provides that “tel pursuant to [Attachment Table 1] subparag. 14(b) of the Enforcement Decree of the Housing Act as one of “quasi-housing”. Moreover, Article 2-2 subparag. 1 of the former Enforcement Decree of the Housing Act defines “offices” as “multi-family housing” and “multi-family housing” separately from “multi-family housing or facilities annexed thereto,” and Article 14(b) of the former Enforcement Decree of the Housing Act provides for the same type of each purpose as one of the Housing Act.

Article 106(4)1 of the Enforcement Decree of the Restriction of Special Taxation Act, upon delegation of the instant tax-free provision, provides that “house” is “house” as above. Meanwhile, the Enforcement Decree of the Restriction of Special Taxation Act, which is the same statute, explicitly states that “officetel pursuant to the Enforcement Decree of the Housing Act” or “officetel used for residence” includes “house”. In other words, Article 95(2) and (2) of the Enforcement Decree of the Restriction of Special Taxation Act, which sets forth the scope of monthly tax deduction from global income tax by delegation of Article 95-2(1) of the Restriction of Special Taxation Act, which sets forth the scope of rental housing subject to tax reduction or exemption for a small-sized housing rental business operator upon delegation of Article 96(1) of the same Act, which sets forth the scope of “house used for rental housing” subject to special taxation for an investment in kind by a rental housing real estate investment company under the delegation of Article 97-6(1) of the same Act, and Article 97-2(1)9(2) of the Enforcement Decree of the Restriction of Special Taxation Act.

B. In full view of the language and text and structure of the foregoing statutes, the purport of the instant tax-free provision to exempt value-added tax on the supply of housing smaller than national housing scale, differences in various legal regulations on housing and officetels, and in particular, the balance with the fact that “offices” or “offices used for residence” differently from the instant tax-free provision is clearly included in “house”, barring any special circumstance, it cannot be deemed that the instant tax-free provision does not constitute “national housing” regardless of whether the use in the public record at the time of supply falls under the scope of national housing scale under the Housing Act.

If a building supplied satisfies the requirements of an officetel under relevant statutes and was registered as a business facility on the public register, even if it satisfies the structure and function that can be actually used for a residence at the time of supply, it may be used as a business facility, which is the purpose of an officetel under the Building Act. In such a case, whether it constitutes an officetel subject to the instant tax exemption provision ought to be determined on the basis of the public record at the time of supply, in principle, on the basis of the purpose of use on the public record at the time of supply. Furthermore, insofar as the relevant building was later excluded from the object of value-added tax exemption under the instant tax exemption provision as it constitutes an

C. Examining these facts in light of these legal principles, the instant officetels satisfies the requirements of officetels under the relevant laws and regulations at the time of supply and its public account is also business facilities. Thus, it does not constitute “national housing” as referred to in the instant tax exemption provision regardless of whether the scale is below the scale of national housing under the Housing Act, or the structure and function that can be actually used for residential purposes, and whether it has been actually used for residential purposes.

D. In the same purport, the lower court determined that the instant officetel, which was permitted to construct and approved to use as “business facilities,” does not constitute “national housing” as referred to in the instant tax exemption clause, and thus, the instant disposition imposing the value-added tax on such premise is justifiable. In so doing, the lower court did not err by misapprehending the legal doctrine on “national housing” under the instant tax exemption clause, contrary to what is alleged in the grounds of appeal. Meanwhile, the Supreme Court precedents cited in the grounds of appeal by the Supreme Court

3. Whether there exists any justifiable ground for exempting from the value-added tax (Plaintiff 1’s ground of appeal No. 2)

The lower court determined that Plaintiff 1 could not be deemed to have justifiable grounds for exempting from the penalty tax on the ground that it is difficult to view that there was a variety of opinions in tax interpretation as to whether the supply of a residential officetel constitutes the subject of exemption from the value-added tax under the instant tax exemption provision.

Examining the reasoning of the lower judgment in light of the relevant legal principles and records, the lower judgment did not err by misapprehending the legal doctrine on justifiable grounds for exempting penalty tax and by failing to exhaust all necessary deliberations, as alleged in the grounds of appeal.

4. Whether simple expense rate is applied (the plaintiff's ground of appeal No. 3)

The lower court rejected the Plaintiffs’ assertion that the instant global income tax imposition disposition, which calculated the amount of income on the sales revenue of housing by standard expense rate, is lawful on the premise that the commencement date of the housing construction and sales business should be deemed to be the “time of commencing the sale of housing” in relation to the application of simple expense rate under Article 143(4) of the former Enforcement Decree of the Income Tax Act.

Examining the reasoning of the lower judgment in light of the relevant provisions and records, the lower judgment did not err by misapprehending the legal doctrine on the commencement date of business under the Income Tax Act.

5. Conclusion

The plaintiffs' appeals are dismissed in entirety as it is without merit, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices.

Justices Lee Dong-won (Presiding Justice)